Dole Is Still Undervalued: Updated Valuation And Analysis Article After Sale To Itochu

Earlier this year I completely dedicated myself to learning the techniques, process, and proper mind set to become an excellent value investor.  I wrote my first full article back in June about Dole Food Company (DOLE).  Here are my thoughts on Dole back in June, and my conclusion thoughts after comparing Dole to Chiquita (CQB) and Fresh Del Monte (FDP).  Due to its big change since that time I have been asked by a reader what my thoughts about New Dole are now that it has eliminated what was its biggest problem; its debt.  Here is just one of the many articles outlining the sale to Itochu for $1.7 billion that is expected to close by the end of the year.

The reader wants to know what I think about New Dole’s prospects going forward, if I still think the company is undervalued, or if I would think about selling now if I find it to be overvalued.

The reader also asked me about the 2009 Dole Food Automatic Common Exchange Security Trust which I talk about here.

Since the transaction has not closed still, most of the information in the above articles remains intact as it pertains to margins and debt levels about Dole’s current state.  I will first value the business as I see it after the sale of its worldwide operations and then comment on what I think about New Dole’s prospects after the transaction closes.  When I refer to Dole as a whole I mean Dole before the sale of its worldwide operations.  New Dole is in reference to my estimates of Dole’s operations after the sale of its worldwide operations.  I have a call into Dole investor relations to get exact revenue and EBIT numbers for New Dole, but to this point I have not received a call back.  I am estimating that New Dole will lose about 36% of its EBIT after the sale of its worldwide operations.  I came to that estimate from looking at Dole’s sale to Itochu presentation from September which can be viewed here.

These valuations were done by me, using my estimates, and are not a recommendation to buy any stock in any of the companies mentioned. Do your own homework.

All numbers are in millions of U.S. dollars, except per share information, unless otherwise noted. Valuations were done using Dole’s 2011 10K, second quarter and third quarter 2012 quarterly reports and presentations, and Dole’s presentation of what it should look like after its asset sale.

The main thing I was worried about with any asset sale is that Dole would have to unload some of its very valuable land assets.  Thankfully after the transaction is completed New Dole will still own 113,000 acres of land including some very valuable land in Hawaii.  All assets below are being kept by New Dole.

Sum of the Parts Valuation

Land Holdings

Dole owns 25,000 acres of noncore land in Oahu valued by Dole at $500 million or $20,000 per acre.  Dole also owns 22,100 acres in Costa Rica, 3,900 acres in Ecuador, and 25,500 acres in Honduras.  Only part of each countries acreage are being used for growing fruit: 8,200 in Honduras, 7,300 in Costa Rica, and 3,000 in Ecuador meaning the rest could presumably be sold without interfering with current operations, about 33,000 acres.

  • All Costa Rica land valued at $5,000 per acre equals $110.5 million.
  • Al Ecuador land valued at $3,500 per acre equals $13.65 million.
  • All Honduras land valued at $3,500 per acre equals $89.25 million.
  • Remaining 36,500 acres valued at $5,000 per acre equals $182.5 million.

Adding total land value estimates up equals $895.9 million just in land value or $7,928.32 per acre, which comes out to $10.18 per share in total land value.

Estimated value of unused noncore land 33,000 acres in the above three countries at $5,000 an acre for Costa Rica and $3,500 for Honduras and Ecuador land is $75.7 million.

Total noncore land assets that could be sold valued at $575.7million total, or $9,925.86 per acre; $6.54 per share in land assets that could be sold.

Ship and Ship Related Equipment

Dole owns 13,300 refrigerated 40ft containers at a very conservative $5,000 each equal $66.5 million.  This is a very conservative estimate as these containers can sell for as much as $50,000 a piece.  I am using $5,000 per unit as my estimate because I want to be extra conservative and because I have not been able to find an exact break down on how many of the 13,300 container units are the 40ft refrigerated units as Dole’s also has some 20ft refrigerated, and completely unrefrigerated containers, so I wanted a very conservative estimate of price to be safe.

Dole also owns 11 ships which I am very conservatively valuing at $1 million each.  I found a few container ships selling for under $1 million but most were well over that price, with some reaching prices over $100 million.  I am again just being conservative here because I do not have vast knowledge on the prices of Dole’s ships.

Adding all of the land, ship, and container value up gets us to a total of:

  • All land, ship, and container value=$973.4 million, or $11.06 per share.
  • Only noncore land that could be sold, ship and container value=$653.2 million, or $7.42 per share.

None of Dole’s operations, cash, debt, or any of its building or other equipment is counted in the above calculations.  I will include Dole’s cash in the below valuation.

I did not include any of its buildings or other equipment in the above valuation because I could not find any concrete information and again did not want to speculate on numbers.

Now I will value Dole’s operations.

EBIT and Net Cash Valuation

Cash and cash equivalents are 82 and it has 0 in short term investments.

Dole as a whole has a trailing twelve month EBIT of 180.7 for its entire current operations.  Per Dole’s sale to Itochu presentation I am estimating that it will lose approximately 36% of EBIT after the sale of its worldwide operations which leads to a trailing twelve month EBIT estimate of 115.65 for New Dole’s operations.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X115.65=578.25+82=660.25/88=$7.50 per share.
  • 8X115.65=925.2+82=1007.2/88=$11.45 per share.
  • 11X115.65=1272.15+82=1354.15/88=$15.39 per share.
  • 14X115.65=1619.1+82=1701.1/88=$19.33 per share.

Combined Valuation Of New Dole

All values are per share values.

Total Land, Ship, and Container Value Only Non Core Saleable Land, Ship, and Container Value
5X EBIT $18.56 $14.92
8X EBIT $22.51 $18.87
11X EBIT $26.45 $22.81
14X EBIT $30.39 $26.75

The only thing the above values are not containing is the debt.  The reason I am not including the debt in any of the estimates of intrinsic value is because Dole as a whole now has total debt of $1.4 billion but will be able to pay off all of it if it chooses to after it receives the $1.7 billion from Itochu.   Thus making the above very good estimates of what New Dole should be worth after selling its worldwide operations and ridding itself of the debt.

I had an additional two paragraphs written about Dole’s TEV/EBIT and ROIC margins but those had to be scrapped since I have still not heard back from Dole investor relations about New Dole’s exact numbers and I did not want to speculate.

New Dole is also forecasting that after the sale is finalized it will be able to save around $100 million in cap ex and corporate expenses by the end of fiscal 2013 which supposedly are going to be yearly savings going forward, and to be able to improve its overall business operations.  Even leaving improvement in operations, possible future acquisitions, and money savings out of all my calculations, New Dole should be selling at a very conservative minimum of $14.92 per share, and I actually think quite a bit higher.  Current share price for the whole of Dole is $10.70 per share, a 29% margin of safety.

Dole management has also stated that after the sale to Itochu is finalized that it may look to sell or spin off further assets, or make some acquisitions to bolster its operations within New Dole, any of which may help unlock further value in its shares.  This is pure speculation, but I could see Mr. Murdock who owns around 40% of Dole, possibly looking to take the New Dole private again now that its major problem has been eliminated so he can control its operations again, which would also help unlock shareholder value.

Why after all of the above has Dole as a whole been dropping in price lately?  My guess is that people have been selling for a combination of the following reasons:

  • That Dole just released bad quarterly numbers that missed analyst estimates and which sent the herd running.
  • Before that people were probably selling some personal shares that they owned to lock in profits since the stock has run up from around $8.50 a share to over $15 a share at one point.
  • A lot of it may also be that people are still treating this as a highly indebted, risky, poorly operated, and marginally profitable company that it is without looking deeper at the assets that it will still hold after receiving the $1.7 billion from Itochu, and how New Dole will now be a much healthier and less risky company.

However, even if you do not count any of its operations at all, Dole as a whole is selling now for less than JUST a conservative value of the land, ship, and containers that it owns.  Meaning the downside is covered by hard saleable assets even if New Dole’s operations were to become massively unprofitable, which I think is very unlikely.

New Dole looks to be massively undervalued, will still hold very good high value assets, especially saleable land, has some future potential catalysts that could help unlock value, it should be able to compete better with Fresh Del Monte and Chiquita, and New Dole will now be freed up to make acquisitions and improvements to its business and operations after the transaction with Itochu closes as it will not be burdened by the massive amount of debt that it has carried for years.

I plan to buy shares for my personal account and add more shares back into the accounts I manage after selling some Dole shares up 70% in September.

Here is a last minute update as Dole has set the shareholder meeting for December 6th to approve this transaction.

Intel Brief Thoughts and Valuations

Intel (INTC) is another company I bought before doing any type of valuations.  Intel is one of the first companies whose annual and quarterly reports I actually read, and it was noticeable even then with my limited knowledge to see its massive competitive advantages, huge margins, the free cash flow it creates, etc.  The following are descriptions taken from Morningstar.

Intel holds long-term advantages over smaller rival Advanced Micro Devices AMD in the microprocessor industry. While there have been rising fears that Intel may have trouble competing against emerging processor design firm ARM ARMH, we believe such panic has been blown out of proportion.

Intel is the largest chipmaker in the world. It develops and manufactures microprocessors and platform solutions for the global personal computer market. Intel pioneered the x86 architecture for microprocessors.

Asset Valuations

  • With intangible assets and goodwill: $7.95 per share.
  • Without intangible assets and goodwill: $6.71 per share.

EBIT and Net Cash Valuations

  • Intel has $0.60 in net cash per share.
  • 5X=$19.00 per share.
  • 8X=$28.82 per share.
  • 11X=$38.65 per share.
  • 14X=$48.47 per share.

Revenue and EBIT Valuations

  • 5X=$14.23 per share.
  • 8X=$22.03 per share.
  • 11X=$29.82 per share.
  • 14X=$37.61 per share.

Operating Cash Flow and Free Cash Flow Valuations

  • Low estimate=$12.05 per share.
  • Base estimate=$17.62 per share.
  • High estimate=$23.18 per share.

Price to Book and Tangible Book Valuations

  • Low estimate=$11.51 per share.
  • Base estimate=$16.82 per share.
  • High estimate=$22.14 per share.

Debt Ratios

  • Current assets to current liabilities=2.45.
  • Total debt to equity=14.7%.
  • Total debt to total assets=9.9%.

Intel’s current only competitor in the computer chip area is AMD who has always been a distant second place to INTC.  Also of note is that AMD’s CFO just resigned which is never a good sign.  Intel has also been increasing its business in the server arena where it also has huge competitive advantages and controls a big chuck of the space.

The only area where Intel has been struggling recently has been in the tablet and smart phone arenas, with Intel having to play catch up to Arm Holdings (ARMH) who was first and best in those areas.  Intel appears to be catching up to ARMH in the tablet and smart phone business segments as it currently has its chips in three smart phones, it will also have its chips in the upcoming Motorola Razr I, the Razr I will launch in October in Europe and Latin America, and its first Intel Powered tablets are going to be coming out in November.

Intel’s huge competitive advantages, size, and balance sheet, have enabled it to catch up to ARMH and I think it will soon surpass Arm Holdings in the mobile processor arena and extend its dominance into new profitable business segments.

Knowing what I know about Intel, its huge competitive advantages, gigantic margins, etc, I have decided to use the 11X EBIT and cash valuation, $38.65 per share, as my estimate of intrinsic value, a 40% margin of safety as its current share price is $23.32 per share.

Even if I were to use the 8X EBIT and cash valuation as my estimate of intrinsic value just to be safe, $28.82, that gets us to a 19% margin of safety.  I think the 8X estimate of value is too conservative with Intel’s massive competitive advantages however.

My current cost basis in Intel is $19.90 per share.  Again a bit fortunate to be up anything since I did not do any type of valuations before I originally bought into them.  With all of the above stated I am going to continue to hold Intel for the long term and have my investment compound hopefully years and decades into the future.

I will also look for opportunities when the stock price is at a healthy margin of safety to continue to add shares to my portfolio and for the portfolios that I manage, now looks like it would be a good entry point, and I will update when and if I buy any more stock in INTC.

Valuations and Brief Thoughts About Vodafone

Recently I decided it was probably time for me to value and analyze each of the companies remaining in my portfolio from before I truly dedicated myself to learning and becoming a “true investor.”  I had never valued any of the companies I am going to be writing about in the next several days.  I have read at least one annual report and one quarterly report, along with a myriad of other articles about each of the companies in the time since I bought them, and I am going to offer my brief thoughts on each.

I am also going to decide if I should keep, buy, or sell any of the companies after determining if I think any of them are under or overvalued.

Vodafone Valuations and brief thoughts

Vodafone (VOD) valuations done on September 10th, 2012.  Valuations in millions of GBP, except per share information, unless otherwise noted.  Valuations done using 2012 10K.

Asset Reproduction Valuation

Assets: Book Value: Reproduction Value:
Current Assets
Cash and Cash Equivalents 7138 7138
Short Term Investments 1323 1323
Accounts Receivable (Net) 3885 3302
Inventories 486 243
Prepaid Expenses 3702 1851
Other Current Assets 3491 1746
Total Current Assets 20025 15603
PP&E Net 18655 9328
Equity and Other Investments 35899 17950
Goodwill 38350 15340
Intangible Assets 21164 8466
Deferred Income Taxes 1970 1000
Other Long Term Assets 3482 1741
Total Assets 139545 69427

Number of shares are 5096

Reproduction Value:

  • With intangible assets and goodwill: 69427/5096=13.62 GBP per share = $21.80 per share.
  • Without intangible assets and goodwill: 45621/5096=8.95 GBP per share = $14.33 per share.

EBIT and Net Cash Valuation

Cash and cash equivalents are 7,138

Short term investments are 5,096

Total current liabilities are 24,025

Cash and cash equivalents + short-term investments – total current liabilities=

  • 7,138+1,323-24,025=-15,564
  • -15,564/5,096=-3.05 GBP per share=-$4.78 in net cash per share.

Vodafone has an EBIT of 11,187.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X11,187=55,935+8,461=64,396
  • 8X11,187=89,496+8,461=97,957
  • 11X11,187=123,057+8,461=131,518
  • 14X11,187=156,618+8,461=165,079
  • 5X=64,396/5096=12.64 GBP per share=$19.79 per share.
  • 8X=97,957/5096=19.22 GBP per share=$30.09 per share.
  • 11X=131,518/5096=25.81 GBP per share=$40.41 per share.
  • 14X=165,079/5096=32.39 GBP per share=$50.71 per share.

Revenue and EBIT Valuation

Numbers:
Revenue: 46417
Multiplied By:
Average 6 year EBIT %: 15.87%
Equals:
Estimated EBIT of: 7366.4
Multiplied By:
Assumed Fair Value Multiple of EBIT: 5X
Equals:
Estimated Fair Enterprise Value of VOD: 36832
Plus:
Cash, Cash Equivalents, and Short Term Investments: 8461
Minus:
Total Debt: 34890
Equals:
Estimated Fair Value of Common Equity: 10336
Divided By:
Number of Shares: 5096
Equals: GBP 2.03 per share=$3.27 per share

The $3.27 per share is my low estimate of value.  My base estimate of value using an 8X multiple was $10.16 per share, and my high estimate of value using an 11X multiple was $17.25 per share.

Price to Book and Tangible Book Valuation

Numbers:
Book Value: 126431.8
Minus:
Intangibles: 23806
Equals:
Tangible Book Value: 102625.8
Multiplied By:
Industry P/B: 1.7
Equals:
Industry Multiple Implied Fair Value: 174463.8
Multiplied By:
Assumed Multiple as a Percentage of Industry Multiple: 65%
Equals:
Estimated Fair Value of Common Equity: 113401.5
Divided By:
Number of Shares: 5096
Equals: GBP 22.25 per share=$35.62 per share.

The $35.62 per share is my low estimate of value.  My base estimate of value using a 95% multiple was $52.05 per share and my high estimate using an 125% multiple was $68.49 per share.

FCF and Cash Flow Valuation

Numbers
Operating Cash Flow: 12755
Minus:
Capital Expenditures: 7852
Equals:
Free Cash Flow: 4903
Divided By:
Industry Median FCF Yield: 6.17%
Equals:
Industry FCF Yield Implied Fair Value: 79465
Multiplied By:
Assumed Required FCF Yield As A % of Industry FCF Yield: 65%
Equals:
Estimated Fair Value of Common Equity of VOD: 51652.25
Divided By:
Number of Shares: 5096
Equals: GBP 10.14 per share=$16.23 per share.

Vodafone’s FCF yield is 5.41%.  The companies I used as comparisons are Verizon, China Mobile, and AT&T.

The $16.23 per share is my low estimate of value.  My base estimate of value was $23.71 per share and my high estimate was $31.20 per share.

Vodafone’s debt ratios are as follows:

  • Current assets to current liabilities: 20025/24025=0.83
  • Total debt to equity: 34957/76935=45%
  • Total debt to total assets: 34957/139576=25%

Brief Thoughts and Conclusions

Vodafone’s valuations are all over the place from a low of $3.27 a share to a high of $68.49 per share.  My cost basis for VOD is $27.37 per share.

After looking at its margins, reading its annual report and all that I have read since buying into Vodafone, I would use either the 8X EBIT and cash valuation, $30.09 per share, or my low estimate of value in the price to book and tangible book valuation, $35.62 per share, as my estimate of intrinsic value.  I would probably lean towards the $30.09 estimate of intrinsic value just to be safe, meaning that I think Vodafone is about correctly priced.

Knowing what I know now, I would not have bought into Vodafone when I did, or at this time, as it does not meet my minimum 30% margin of safety.   Others reasons I would not buy into it at this time are:

  • The high debt levels.
  • Massive amounts of cap ex needed constantly.
  • The problems that it has had in India and other countries lately
    .

I do not think that Vodafone is a bad company by any stretch of the imagination, I just bought into them at too high of a price and for the wrong reasons; mainly its dividend.

I really like that it is a truly global company with some very good assets, including being a 45% owner of Verizon.

For now I am going to hold onto Vodafone until there is some kind of clarity from Verizon on its dividend payment strategy towards Vodafone, and/or until I find another company to buy as I think I will have a hard time making money at my currently too high cost basis in Vodafone, and I will possibly look to sell my stake in VOD when I find another attractive company.

Fresh Del Monte: Valuation and Analysis Series (Part 3)

In the first two of four articles in this series, here, and here, I got into valuations and analysis of Dole (DOLE) and Chiquita (CQP).

Fresh Del Monte (FDP) will be the subject of this article.  I will detail their operations, and do two valuations of the company.

In the fourth post of this series I will attempt to determine if a merger between any of the three companies should happen, and what I think would be the best options. I will go over the margins of each company and try to determine if any of the three have any sustainable competitive advantages. I will also put forth my thesis of which one, if any, would be a good long-term buy without the possibility of a spin-off or merger from any of the companies.

Fresh Del Monte Produce Inc. is one of the world’s leading vertically integrated producers, marketers and distributors of high-quality fresh and fresh-cut fruit and vegetables, as well as a leading producer and distributor of prepared food in Europe, Africa, the Middle East and the countries formerly part of the Soviet Union. Fresh Del Monte Produce Inc. markets its products worldwide under the Del Monte® brand, a symbol of product innovation, quality, freshness and reliability for over 100 years.  Description taken from their website here.

For further information and specifics of their operations please refer to their website.

Both Fresh Del Monte valuations were done on 6-20-2012. All numbers are in millions of U.S. dollars, except per share information, unless otherwise noted. Valuations done using March 2012 10Q and 2011 10K.

These valuations are done by me, using my estimates, and are not a recommendation for you to buy the stock. Do your own homework.

Assets: Book Value: Reproduction Value:
Current Assets
Cash 27.5 27.5
Marketable Securities 0 0
Accounts Receivable (Net) 407 300
Inventories 445 178
Prepaid Expenses 38.7 15
Deferred Taxes-Tax Liability 0 0
Total Current Assets 918.2 520.5
PP&E Net 1016 450
Goodwill 405 150
Intangible Assets 68.4 20
Total Assets 2407.6 1140.5
  • Total Shares=59

Reproduction Value:

  • With IA 1140.5/59=$19.33 per share.
  • Without IA 1120.5/59=$18.99 per share.

Current price is $22.66 per share on 6-23-2012.

Second Valuation:

  • Cash and Cash equivalents of 27.5
  • Number of shares are 59
  • Total current liabilities are 548.5

Short term investments + cash and cash equivalents – current liabilities =

  • 27.5+0-548.5=-521
  • -521/59=-$8.83 in net cash per share.

Fresh Del Monte has an EBIT of 106.5, using trailing twelve months numbers.

5X, 10X, and 14X EBIT.

  • 5X106.5=532.5+27.5=560
  • 10X106.5=1065+27.5=1092.5
  • 14X106.5=1491+27.5=1518.5
  • 560/59=$9.49 per share.
  • 1092.5/59=$18.52 per share.
  • 1518.5/59=$25.74 per share.

Current share price is $22.66 per share on 6-23-2012.

Current market cap is 1,350 million.

Enterprise value is 1,510 million.  Enterprise value taken from Yahoo Finance.

  • EV/EBIT=1510/106.5=14.18

In the last article here on Chiquita, I got into one of my major gripes with them, their huge amount of total long term contractual obligations.  I am now going to compare Fresh Del Monte’s total long term contractual obligations with theirs.

On page 54 of Fresh Del Monte’s 2011 10K is a table describing their total contractual obligations, which come out to a total of $1.992 billion.  They have a current market cap of $1.31 billion.

That is a much more sustainable ratio than Chiquita’s total obligations of $3.2 billion and their total market cap of $220 million.

The fourth and final article in this series will be next.  I will try to determine which company, if any, I would buy without the possibility of any kind of spin off or merger.  I will try to determine if a merger between any of the three would be a good thing.  I will also go over margins of all the companies, and their specific operations to see if any of them have any sustainable competitive advantages.

Current Portfolio

Image

Here is an overview of my current portfolio: Dividends are reinvested on all stocks that have dividends except KMR, was told KMR does not allow partial shares to be reinvested by my broker.

Portion bought before doing any valuations and less research than I am doing now. Lessons to be learned.

Giant Interactive (GA) 34 shares originally acquired 20 shares in November 2010.  Will get back to later

Intel Corp (INTC) 15 shares bought originally at a cost basis of $19.72

Kinder Morgan Management (KMR) bought 5 shares at a cost basis of $62.50

Main Street Capital (MAIN) bought 15 shares originally at a cost basis of $18.73

Altria (MO) bought 11 shares originally at $26.91

Philip Morris (PM) bought 5 shares originally at $69

Taseko Mines (TGB) have 70 shares total now at a cost basis of $4.77, ouch, will get back to later

Universal Insurance Holdings (UVE) have 49 total shares now at a cost basis of $4.85

Vodafone (VOD) bought 11 shares originally at $26.21

Stocks after valuation and now doing a lot more research

Vivendi (VIVHY) 32 shares at $18.35

Dole (DOLE) 58 shares at $8.74 owned in retirement portfolios that I manage for others.

Also own Vivendi 62 shares at $16.19 in retirement portfolios that I manage for others.

I wish I would have been doing valuations and the amount of research I am doing now from the beginning of my investing journey, I would have saved myself a lot of money, around $600.  Would have stopped me from buying a lot of overvalued companies and bad companies.  Most of the money I lost was when I first started and about half of my portfolio was in Chinese small caps ouch again, which brings us back to GA.

I just sold my entire position of 34 shares in GA, the other 14 shares were from a special dividend paid and a regular dividend paid.  I did some valuations of GA yesterday and got a reproduction value of $1.45 per share.  If it was selling at 5X EBIT and 10X EBIT I got prices of $3.88 and $7.77 per share respectively.  I try to be very conservative in my valuations so I get the biggest margin of safety, and hopefully a bigger return later on.  I usually won’t buy now unless there is a 50% or greater margin of safety.

Not good since my cost basis even after the special dividends was around $6 per share for GA, remember I bought GA before I started doing valuations or the amount of research I am doing now.  So even if it was selling at 10X EBIT it would not have met my criteria now of the 50% margin of safety.

Taseko Mines is kind of in the same realm my cost basis now is $4.77 per share at 70 shares, bought all shares before doing any valuations, now I get a reproduction value of $3.70 per share.  So not only will I most likely lose money on this stock no matter what happens, even if the Prosperity mine that would be a gold and copper mine if it is approved, gets approved I still would only make a minimal amount of money due to my high cost basis and lack of margin of safety.

The lesson here is to get decent at some valuation techniques buy at a margin of safety and hold and reinvest the dividends if they have dividends.

Oh and don’t have half of your portfolio in Chinese small caps as a beginning investor when you aren’t doing valuations or in depth research.

My next post will be going over my detailed valuations of Vivendi and Dole, my reasonings for buying them, how long I plan to hold them, and which part of the portfolio both with be in.